Uniform Mortgage Regulation and Distortion in Capital Allocation

The federal mortgage policy, the conforming loan limit (CLL), was spatially uniform before the recent financial crisis, despite heterogeneity across geography. An increased CLL leads to remarkable regional variation in declines in jumbo loan applications, exogenously increasing jumbo-lending competition differently across regions. I find that in areas with larger jumbo declines, lenders raise jumbo loan approval rates, extend credit to riskier borrowers, lower mortgage rates to defend short-term market share, and incur deteriorated asset quality in the long run. Overall, my findings suggest that the uniformity of federal policy could distort lenders' incentives and cause inefficient credit allocation across regions